Steel firms likely to see healthy growth in volumes, profitability in FY19

Steel companies are in the news for strong production numbers. In FY18, JSW Steel posted a 5 per cent increase in production and Tata Steel India (domestic operations) reported its highest ever output at 12.48 million tonnes (mt), an increase of 7 per cent. Analysts expect to see healthy growth in volumes and profitability in FY19, too. 

Shares of Tata Steel and JSW Steel are up 7-9 per cent, while Steel Authority of India (SAIL) and Jindal Steel and Power (JSPL) have gained 12-17 per cent from their March-end lows.

The confidence not only stems from good volumes but improving realisations also. In the quarter gone by (Q4 FY18), realisation of long products surged 20 per cent sequentially, helped by increase in construction activities, said analysts. Higher realisations also mitigate concerns on higher raw material costs for non-integrated players.

SAIL’s operating profit rose 51 per cent sequentially. The turnaround for JSPL and SAIL will improve their balance sheet, and is a key reason for the sharp rally in their stock prices.

The domestic environment has been helped by higher steel exports (up 35 per cent year-on-year to 8.9 mt in FY18). The analysts expect firms to report higher mix of export sales, especially JSW Steel and Tata Steel. 

Analysts at Morgan Stanley say domestic fundamentals remain strong. They expect a 6 per cent demand growth in FY19 compared to 4 per cent in FY18. This, coupled with India’s modest exports, will lead to an improvement in capacity utilisation, from a decade low of 81 per cent in FY16 to 85 per cent in FY19. The 12 per cent rise in China’s steel prices in 2018 should support domestic realisations, though the analysts remain watchful of US imports.

Among steel stocks, JSW Steel remains the top pick. Rising domestic volumes, lower iron ore prices and superior balance sheet are benefitting the firm. Sharekhan estimates JSW’s consolidated Ebitda to compound at 13 per cent annually during FY17-20. Though Tata Steel India should perform well, analysts are monitoring Tata Steel Europe’s exports to the US.